TURKEY - Exploration & E&P Terms.

About 20 companies are exploring for oil and gas in Turkey's 18 Petroleum Districts, compared with more than 25 companies in 1991. Most of them came in after the oil discoveries of 1989. A decline in exploration since 1995 has led to a fall in oil production. Peak production in Turkey's oil history was reached at 90,400 b/d in 1991.

The setback for Turkey occurred in 1995, when Shell decreased its exploration considerably and sold its interests in 27 fields to Perenco, a multinational group based in Paris and London. Mobil has done the same. But both have remained active in both Turkey's upstream and downstream sectors.

Shell had become convinced since 1993 that the prospects in south-eastern Turkey were limited and that there were no significant deposits of high quality oil similar to those found in Syria, across the border.

The Background: Exploration for oil in Turkey dates back to the 1880s, with some very small discoveries made years after Baku, capital of Azerbaijan, began to be called "a new Texas" for the Russian empire. Exploration was resumed after World War I, and the first commercial oil discovery was made in 1945 at Raman in the south-eastern district of Siirt. But it was not until the early 1950s, six years after the end of World War II, that oil production began.

The explorer at the time was Turkey's State Minerals Exploration Institute (MTA). With the help of some Western experts, MTA found oil at Garzan in 1951, also in Siirt close to Raman. But its work was not satisfactory to Ankara.

The state formed Turkiye Petrolleri Anonime Ortakligi (TPAO) in 1954 to take over from MTA, to invite foreign companies to explore for oil and produce it as partners, and to handle the downstream sector. With the advent of foreign firms, many fields were found in the subsequent years.

In 1958, a JV with American Overseas Co., called Aladdin/Amoseas (now known as Aladdin Middle East), made an oil discovery at Kahta. The field was very small, containing heavy 11.5 deg. API oil, and the US company later sold its stake to a group of private Turkish interests represented by a company called Ersan, which later was called Aladdin Middle East. Aladdin as operator found other oilfields in the subsequent years.

Mobil came in during the late 1950s and in 1960 found the Bulgurdag field containing 37.9 deg. API oil in the Adana Basin of District 14. It was the first discovery of high quality oil in Turkey. In 1964, Mobil found another field in Siirt, containing 34.4 deg. API oil. But these fields remained small and re-exploration resulted in small discoveries. Mobil sold its interests in its producing fields to TPAO in 1994, when their total output was about 3,000 b/d. But Mobil continued to operate in the country as an explorer and as a downstream investor.

Shell came in during the late 1950s and took blocks in the Diyarbakir and Gaziantep provinces. It started exploration in 1960. In 1961 it found two connected fields at Kayakoy, in Diyarbakir, containing 34.7-38.2 deg. API oil.

At the same time, TPAO found a third connected field, Kayakoy South. This contained 30.4 deg. API oil, but the structure was small.

Shell found many other fields in that region, and all were small. In Gaziantep, Shell's first discovery was Piyanko, containing 35.5 deg. API oil. By 1994, when it offered to sell its interests, it had 27 developed fields together producing about 13,400 b/d (see profiles in Part 2).

Almost all prospective blocks have been licenced. TPAO acts as an operator in its own concession areas and as a partner of foreign companies elsewhere.

Improved E&P terms in March 1983 encouraged a number of companies to explore in Turkey. A major oil discovery in 1989 lured more companies to Turkey. But the pace of discoveries was slow in the five subsequent years and many companies have since left the country.

Those who came included Roy M. Huffington (Huffco) of the US, which acquired 13 licences at the north-western end of the Taurus-Zagros belt and other acreage then said to be rich in gas. Offshore and onshore exploration in Iskenderun Bay was undertaken by TPAO and Salen Energy of Sweden, but the outcome has been negative.

US, Canadian and Norwegian companies led by Seahawk of California took the Saros Bay acreage. Barrick Petroleum of Canada joined TPAO in a Black Sea block as well as in the onshore Sinop and Samsun Basins. Lennox Oil of Scotland took the Salt Lake Basin in central Turkey.

Other companies involved in the new drive were Atlantic Richfield (Arco), Occidental Petroleum (Oxy), Texaco Nederland BV, Unocal, and Canada's Asamera and Denison Mines. Unocal also joined TPAO in exploring for geothermal energy in eastern Turkey, where the state corporation has a 30% interest in a $300m venture. Now explorers include the Czech company MND.

The petroleum law of 1983 allows the foreign or local private operator to export 35% of production in onshore fields and 45% of production in offshore fields, these being the main incentives. The law also allows an upstream operator to build a grass-roots oil refinery in Turkey or to conclude third party processing deals with the country's existing refineries.

Under the upstream system, a "Certificate" allows both local and foreign oil companies to establish downstream ventures. Certificates for periods of up to 30 years, renewable for another 10 years, have been issued for oil refining, transport and distribution, as well as gas marketing. The Minister of Energy and Natural Resources is empowered to issue such certificates.

Provisions for the repatriation of exploration expenses and profits have been improved. There are better E&P terms for operations in technically difficult or geologically complex areas, such as the Black Sea, with each case being negotiated under different conditions.

Other improvements include a better definition of what is remittable under the law, and an easier process for the extension of licence and drilling periods in areas affected by political violence. The cost recovery rate is 50%, which is quite attractive compared to cost recovery terms on offer in the Middle East.

Production sharing applicable between TPAO and foreign operators is based on a sliding scale, which varies with the volume of oil production. Shell, for example, had a 50-50 split at the lowest end of the scale; and beyond 10,000 b/d its share fell in favour of TPAO. At the highest level, the split was 30-70. Accordingly, the repatriation of registered capital could only be made from oil revenues generated from a new discovery.

Small fields, or small producing ventures, were quite profitable, the main reason why Perenco bought Shell's interests in the 27 oil producing fields. In other countries such fields are considered marginal.

Incentives include: tax exemptions; a duty-free import allowance for materials and equipment not available in Turkey; depreciation on fixed assets; exemption from VAT, limited to purchase of goods and services for exploration; a depletion allowance, though restricted to capitalised exploration costs, intangible drilling costs, and costs of dry-holes; the possibility of creating and/or transferring rights in licences and leases, similar to those exercisable in real property; the right to export 35% of onshore, and 45% of offshore oil production from fields discovered after January 1980; and deduction of some exploration costs from annual licence rentals.

A surcharge of refiners, decreed in 1980, has funded a special facility to provide upstream operators with soft loans in local currency, the Turkish lira (TL). The facility has given foreign E&P operators TL loans for up to five years at 10% annual interest, which is quite low compared to the current interest rates on TL loans. Loans to TPAO are for 20 years at 10%.

TPAO and foreign E&P operators are also allowed to have an FOB-East Mediterranean crude oil pricing benchmark, based on spot market quotations, to determine the wellhead value of crudes these companies produce in Turkey. This is under a decree issued in June 1983. In addition, there is a ceiling of 55% on all taxes paid by foreign and national operators in the oil sector. A December 1985 decree has reduced the withholding tax rate on non-domiciled foreign companies serving the oil exploration sector, from 25% to 5%.

The Petroleum Affairs Directorate at the Ministry of Energy and Natural Resources has been in charge of the upstream sector. In 1987 it circulated a model production sharing agreement (PSA), under which TPAO was able to take a direct stake of 15%, and the government's interest could reach 50% through a 35% tax in the event of a commercial discovery. This has since been revised slightly to attract foreign investors.

In the concession type of agreements with foreign companies, the latter pay a royalty of 12.5%, a tax on net corporate income, and a small surcharge for the "Fund for Support of the Defence Industry".

The permit is a non-exclusive right allowing the holder to carry out exploration activities, including structural core-hole drilling for geological information. The period of the permit has been specified by the Directorate, usually for one year. A permit may cover one or several districts or open portions of districts.

The licence is an exclusive right allowing the holder to drill, develop and produce. The maximum area covered by a licence is 50,000 hectares (about 123,000 acres). No company may hold, directly or indirectly, more than 8 licences in any one of the 18 districts. TPAO is entitled to a maximum of 12 licences in each district. The licence has a term of four years, to be extended for another four years in two increments. The term can be extended for a period not exceeding three years from the date of discovery, sufficient for the licencee to delineate the field. (Terms and limits may be extended by 50% in marine exploration areas). The licencee must begin exploration within one year from the date of the award. Drilling must start not later than three years from the award.

After a commercial discovery, field definition and development, the licencee begins production, paying a low annual rent during the first three years, a higher rent during the fourth and fifth years, and a higher one thereafter. Expenditures incurred by the licencee in any given year for exploration and drilling may be deducted from up to 50% of the amount of rents. A licencee is also liable for a royalty equal to 12.5% of production. This cannot be credited against rentals. Rent may be reduced by 50% for "marine exploration", by the Energy Ministry. (TPAO is exempt from rentals).